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Treasury Dept.

The U.S. may be going broke, but perversely, people want dollars and U.S. Treasury debt. It’s the only thing they can count on. If the feds ever run out, they know they can depend on Ben Bernanke and his central banker friends to give them more.

According to Bloomberg, "The U.S. government received record demand for its bonds in 2011, pushing longer-maturity Treasuries to their best performance since 1995 in a sign that President Barack Obama may have little difficulty financing a fourth consecutive year of $1 trillion budget deficits. The Treasury Department attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold, the most since the government began releasing the data in 1992 during the George H. W. Bush administration. The US drew an all-time high bid-to-cover ratio of 9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they pay zero percent interest. The spreading sovereign debt crisis in Europe and slower global growth are driving investors to the safety of US assets, helping to contain borrowing costs and making it cheaper as a percentage of gross domestic product to finance deficits than when the nation last had budget surpluses."

The boom in government debt is obvious from a glance at the chart of the iShares Barclays 20+ Year Treasury Bond (TLT) ETF, up 33% in the past year.

It would seem that there is insatiable demand for U.S. debt. Heard that one before? In 1999 there was an insatiable demand for stocks. Remember, there were 70 million baby boomers preparing for retirement. What choice did they have? They had to buy stocks, right? Wrong, stocks went down in January 2000. In real terms, they’re considerably lower now, depending on how you adjust for inflation.

Then, in 2005, remember the insatiable demand for housing? More immigrants. More families getting richer. Everyone wanted to get on the housing ‘escalator’ before it was too late. But in 2007 it turned out that investors were already satiated. They had enough housing and housing debt.

Now U.S. government bonds are in a bubble, with the highest prices and lowest yields in more than a century. But bubbles do not necessarily blow up right away. It can take time for the pin to approach, and Mr. Market is a pretty cunning old fellow. Our guess is that he will want to draw more of the world’s wealth into the U.S. bond market...before blowing it up.

Does that mean you can safely buy US bonds in 2012? Not at all! Stay away, far away. Bubbles are always dangerous and a bubble in the world’s reserve asset — U.S. dollar-denominated debt — is the most dangerous ever. When it blows...penguins at the South Pole will have to cover their ears. Deaf people will complain about the noise. And the shock wave will knock down a large part of the entire world’s capital structure.